Household production and the excess sensitivity of consumption to current income

Empirical research on the permanent-income hypothesis (PIH) has found that consumption growth is excessively sensitive to predictable changes in incom e. This finding is interpreted as strong evidence against the PIH. We propo se an explanation for apparent excess sensitivity that is based an a quanti tative equilibrium model of household production in which permanent-income consumers respond to shifts in sectoral wages and prices by substituting wo rk effort and consumption across home and market sectors. Although the PIH is true this mechanism generates apparent excess sensitivity because market consumption responds to predictable income growth. (JEL D13, E10, E21).